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Applicability of Limitation Act to Initiate Insolvency process against debtor under Insolvency and Bankruptcy Code

Insolvency is the situation in where debtor is not in a position to pay back his creditor and bankruptcy is the legal declaration of Insolvency. All insolvencies need not lead to bankruptcy. The Insolvency and bankruptcy code of 2016 has successive procedure of Insolvency resolution, failing to which, it leads to Bankruptcy followed by liquidation of assets. The code is to consolidate and amend the laws and regulation relating reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of value of assets of such person, to promote entrepreneurship, availability of credit and makes it easier for weak companies to exit or restructure their businesses. This code is applicable to all sort of business entities including companies, limited liability partnerships (LLP), partnerships, and individuals etc.
It is known that Insolvency & Bankruptcy Code came into effect from 1stDecember 2016. Since, I & B Code was introduced, there has been dispute as to whether I & B Code can override Limitation Act in absence of any specific provision of limitation incorporated therein.

Whether the Limitation Act applies on I and B code

The code has been used by several creditors to recover their dues or debts in such cases many questions have been raised, one of among those questions is whether for a time-barred claim/debt an application under the I&B code can be filed. The question has arisen in number of cases. There is no provision in the code which specifically makes limitation act applicable to the I & B code butearlier when the applicability of the Limitation Act was judged upon by the National Company Law Tribunal (NCLT), they had held that the same would very much be applicable on the IBC.

In Deem Roll-Tech Limited v. M/S R.L. Steel & Energy Ltd.[1],the question pertaining to initiation of CIRP for a time-barred claim came before the Principal Bench of NCLT. The bench held that the period of limitation would be applicable as the claim made by the operational creditor is beyond the prescribed will be barred by the limitation act i.e. 3 years.

The view of the bench was:
“Section 255 of IBC provides that the Companies Act, 2013 shall be amended in the manner specified in the eleventh schedule to I & B code and a perusal of the eleventh schedule of I & B code discloses the amendments made to the Companies Act of several provisions though not Section 433 of the Companies Act wherein specifically the provisions of the Limitation Act is made applicable and that it shall, as far as may be apply to the proceedings or appeals before the Tribunal or Appellate tribunal as the case may be.”

Therefore, the I & B code is silent on the grounds of on what date the insolvency resolution must be filed then of course in the absence of specific bar in I & B code, the application of limitation act read with Section 433 of the companies act, the debt, which is barred by the limitation, cannot be the basis for invoking I & B code under NCLT/NCLAT.

A similar question arose in Sanjay Bagrodia v. Sathyam Green Power Pvt. Ltd.[2]before the Principal Bench at New Delhi. To counter the plea that Limitation Act will be applicable to proceedings under I & B code, the counsel for the operational creditor contended that tribunals are creatures of a statute and the Limitation Act, 1963 cannot be read into the Statutes creating the Tribunals unless it is expressly provided. He drew the attention of the Bench to Section 238 of I & B code and argued that this is a non-obstante clause which provide that theI & B codewill have its effect notwithstanding anything inconsistent therewith contained in other laws for the time being in force.The bench relied on its decision in Deem Roleand held that limitation period is applicable and that the rule of prudence requires that public policy of law must be given effect which is widely followed.[3]

Hon'ble Justice MM Kumar in Sanjay Bagrodia also referred Section 60(6) of the Code and held that it provides for application of Limitation Act, 1963 to the I & B Code. The section provides as follows:
"Notwithstanding anything contained in the Limitation Act, 1963 or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded"[4]

However, the position since has been changed, The National Company Law Appellate Tribunal ("NCLAT") has recently in the case ofNeelkanth Township and Construction Pvt. Ltd. v. Urban Infrastructure Trustees Limited[5]ruled that the Limitation Act, 1963 is not applicable to the Insolvency & Bankruptcy Code, 2016 ("IBC"). In effect, the NCLAT has held that debts which were otherwise not recoverable due to being time barred, can now be basis for initiating insolvency proceedings.

Brief Facts of the case:-an appeal filed by a corporate debtor (Neelkanth Township & Construction Pvt. Ltd.) against the order of the National Company Law Tribunal ("NCLT") allowing commencement of insolvency proceedings on the action of the financial creditor (Urban Infrastructure Trustees Ltd.). The financial creditor had subscribed to optionally convertible debentures ("OCDs") issued by the corporate debtor. OCDs carried nil or 1% p.a. interest rate and matured in years 2011, 2012 and 2013.The Appellant challenged the impugned order on several grounds, one of which is the time barred debt cannot be enforced by filing of application for corporate insolvency resolution process. The Appellant contented that the claim of respondent is completed time barred as the Debenture Certificates were due for redemption as far back as in the years 2011, 2012 and 2013 respectively; consequently, the application filed in the year 2017 is hopelessly time barred. judgement Contention by Corporate Debtor on Limitation before (NCLT and NCLAT):The 3 years limitation period for seeking remedy for the debenture certificates has already expired since the date of its maturity as the debt is related to years 2011, 2012 and 2013.

Before National Company Law Tribunal: NCLT vide its order dated 25.04.2017 in its order categorically dealt on limitation that since the debtor company is a private limited company and for these OCDs cannot be transferred like in a public company. And further a non-payment on its maturity takes away its marketable nature and does not require a stamp duty.

Question of time-barred debts is ‘ex-facie’ and therefore such argument is baseless. It need not be profoundly said that admission appearing in the financial statement is an acknowledgement covered by S.18 of Limitations Act. It is ‘in-rem’ in nature and construed as existence of debt.

Before National Company Law Appellate Tribunal: The NCLAT dismissed the appeal and held that that in the absence of any provision in I & B code, the Limitation Act, 1963 would not be applicable to initiation of Corporate Insolvency Resolution Process. The bench further observed and followed as:
"The I & B Code, 2016 is not an Act for recovery of money claim, it relates to initiation of Corporate Insolvency Resolution Process. If there is a debt which includes interest and there is default of debt and having continuous course of action, the argument that the claim of money by Respondent is barred by Limitation cannot be accepted.

Therefore, as of now the law stands on the footing that for bringing application under I&B Code, 2016, adherence to Limitation Act, 1963 is not required. Even when a creditor comes up with a time-barred claim/ debt, the process of Corporate Insolvency Resolution Process can be initiated at his instance. The ruling of the NCLAT is in consonance with the propounded object of the Code i.e. it is not a forum or tool for debt recovery but a platform for reinstating and revival of business which cannot be denied merely because the claim has become time-barred and there can be no default in respect of the same”.

Supreme Court: held that “We do not find any reason to interfere with the order dated 11.08.2017 passed by the National Company Law Appellate Tribunal, New Delhi.”
In view of this, we find no merit in the appeal. Accordingly, the appeal is dismissed keeping the question of law viz.whether the Limitation Act would apply to this proceeding, open.”

The same contention again raised in the following case of Black Pearls Hotel Pvt. Ltd v. Planet M Retail Ltd.[6]Where the National Company Law Appellate Tribunal again examined the issue whether the period of limitation prescribed under Limitation Act 1963 is applicable to bankruptcy code 2016.The NCLT dismissed the insolvency application mainly on the ground that the debt was time barred under the Limitation Act. NCLT held that “when the debt was a time barred one there was no legal obligation on part of the corporate debtor to pay the same and due to lapse of time the right to sue was barred by limitation and hence in this case there was no debt as defined in the Code.

This impugned order of the NCLT was challenged by the appellant before the National Company Law Appellate Tribunal (“NCLAT”). Appellate Authority reaffirmed its earlier judgment in Neelkanth Township’s case[7]where it was held that the Limitation Act is not applicable to the Code.

Conclusion
The Supreme Court has kept this issue open as it has not given any finding on this. Interesting aspect is Limitation Act was enacted as a guiding factor to put a time within which any available legal remedy is to be exercised where an enactment is not having any specific provision towards limitation.

The limitation factor has a reference under Section 60(6) and 179(3) of I & B Code, 2016 which are almost similar in wording. However, a quick reference can be made to Section 60(6) as below:
“Notwithstanding anything contained in the Limitation Act or in any other law for the time being in force, in computing the period of limitation specified for any suit or application by or against a corporate debtor for which an order of moratorium has been made under this Part, the period during which such moratorium is in place shall be excluded.”

Crucial Factors
Additionally, what will be the outcome by Supreme Court on the possible interpretation finally is not known at this point of time. However, it must be understood that any interpretation shall be subjected to the following crucial factors as well:
·It is also a fact that all enactments are prospective in its applicability unless the intent and object of the legislation is to give any retrospective effect.
·It is also a trite law that no person can sleep over his/her right and come to Court for a remedy after infinite time.
·If any enactment lacks a categorical provision of limitation then it shall be resorted to Limitation Act, 1963 otherwise the Limitation Act will become redundant.

At the same, the insolvency process is an independent process with different objective andcan beinitiated at any given point of time. But, the proceedings and passing the bar of limitation shall be dependent upon further 3 legs as below:
1st Leg of Claim– Section 3(6)
2nd Leg of Debt– Section 3(11)
3rd Leg of Default– Section 3(12)

These need to be read together as well while concluding on any aspect including limitation if it is to be made applicable.

Though there cannot be a blanket no for applicability of limitation on I & B Code, 2016 but all factors have to be read, understood, analyzed and implemented to carry out the harmonious object and intent of the legislation.

Hence, it may be in the totality of provisions as stated above, the question of applicability of Limitation Act, 1963 on I & B Code,2016 must have been kept open in Neelkanth Township and Construction Pvt. Ltd. by the Supreme Court.

End-Notes
[1] Company Application No. (I.B.) 24/PB/2017
[2] C.P. No. (IB)108(PB)/2017, MANU/NC/0465/2017.
[3] Supranote 4
[4] Id
[5] Company Appeal (AT) (Insolvency) No. 44 of 2017
[6] Company Appeal (AT) (Insolvency) No.91 of 2017
[7] Supranote 8

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